BOOT -- “Da Bears”

The one sentence bearish case for BOOT is that outside shareholders are second class citizens without any power to effect changes, that the company is a below average operator, and that the combination of these two factors demands a discounted valuation.

The Schneider family owns roughly 42% of the outstanding shares so the CEO Joseph Schneider can prevent any takeover or management change no matter how bad things get operationally. Also, the entire board of directors except 1 member is pre-March 2005 meaning that they are all buddy’s of the CEO’s late father who died in 2005 but held on to the Chairman’s title until his last days.

Concentrated ownership controlled by one family (in this case they were not the founding family but George Schneider led the management buyout in 1982) does not generally bode well for unlocking the maximum shareholder value. While the current management has certainly done a good job turning the company around, in cases where the CEO has the board under his thumb one always has to wonder how much more could have been done and will be done in the future.

While the compensation structure detailed in the latest proxy is by no means egregious, a few less noticeable details support the point made above. For example, looking over the last two annual proxy statements it looks like the CEO’s total compensation doubled in 2006 versus the previous year. The increase in total comp was almost entirely due to increase in incentive compensation. So, what? After all, the company had a good year.

The interesting thing is that the increased incentive was achieved by changing how calculations are made to decide if management met their goals. The change in calculation was small (revenue growth became 40% of goal vs. 50% the previous year) but it was enough to ensure a higher payout. Also, management is only taking a small part of their total compensation in the form of options or restricted equity. They can basically take the money now as opposed to taking stock linked compensation and only get rewarded if shareholders get rewarded.

The second part of the bearish case is that BOOT is a below average operator in the industry. Measured by both gross and ebitda margins, BOOT is below the industry medians. Also, the company has less revenue, less EBITDA, and virtually identical book value as it did 9 years ago (this is as far as I have data). It’s true that the company has most recently consolidated its business and walked away from less profitable revenue, but the point is that the company has been a below average operator in the industry.

Considering the fact that BOOT is a less efficient operator than its peers combined with a CEO who knows he will keep his job even if he lags the industry, its no wonder that BOOT is trading at a discount valuation to the group. On top off all that, BOOT gets almost all its sales in the U.S. and is highly depended on both U.S. consumer spending and domestic economic growth.


DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.